City Comment: Workers need to learn the right skills

The immediate cause for the surge in unemployment throughout the developed world has of course been the recession but behind this cyclical issue is the structural weakness of the mismatch in skills.

Economic growth will not of itself bring the jobs, for many of the jobs lost will never return. But how do you know what the jobs of the future will be when they don’t exist yet?

“Today 40 million workers across advanced economies are unemployed. At the same time, businesses in those nations say that they often can’t find workers with the skills they need.”

That is the introduction to a new study, Help Wanted: The future of work in advanced economies, by McKinsey Global Institute, which tackles this sad paradox of our times in a much more thoughtful manner than much of the present political debate, not just here but pretty much everywhere.

The starting point is to understand why the nature of work is changing. One reason is technology. For many years, factories have become increasingly automated as machines replace people. Now the same is happening to routine service-industry jobs: internet banking replaces bank-tellers, online travel ticketing replaces the travel agent. There are jobs which are booming: jobs involving interaction between two people and which need problem-solving skills and experience — for example a lawyer or a nurse. But they require high skills.

This leads to the second big shift in the labour market: the rising premium on such high skills, where pay has continued to rise. There is also demand for low-skilled people in jobs that cannot be traded internationally, such as food-preparation. Between these two ends of the labour market job opportunities have been squeezed. The challenges are to lift skill levels to meet the demand at the top end, and to improve the quality of the jobs at the bottom.

Shift number three is the geographic mismatch, both within countries and between them. We have that in Britain, where the unemployment rate in the South-East is 6%, half that of the North-East. Much the same is happening in America, where labour mobility is the lowest for 50 years, and across Europe. McKinsey argues that there policies to tackle this, including using the new communications technologies to bring work to where the people are, and trying to spread economic development more widely.

Shift four is using untapped talent, especially of the young. The rise in youth unemployment is one of the most troubling features of the job market. We are worried, as we should be, that our young people can’t find jobs, but the really alarming examples are in places such as Spain, where nearly half its youth is unemployed. Germany and the Netherlands by contrast, have quite low youth unemployment.

Two other groups can help fill the skill gap: older workers and women. Germany faces the problem of a shrinking workforce, yet it could add another 1.2 million people to that workforce were it to reach the same level of labour participation as Sweden.

Finally, there are growing disparities of income. We worry a great deal about this in the UK and heap blame on successive governments for allowing this to happen. But the problem is pretty universal.

A study by the OECD shows that over the past 25 years there are only four countries in the developed world where the income of the bottom 10% of households has risen significantly faster than that of the top 10%. In the UK there has been some shift of wealth to the top 10% but we are in much the same broad area as Sweden, Finland and New Zealand.

So what’s to be done?

McKinsey sketches three broad approaches, all of which seem pretty sensible. One is to have sustainable macroeconomic policies. I don’t think anyone would quarrel with that. The second is to focus on developing human capital at every level. This must be right too. In a world where other forms of capital flash around the globe, developing the education and skills of your own people is a crucial element of competitiveness. Of course that is easier said than done but if you look around Europe some countries are undoubtedly doing better than others.

And third, there are what are loosely lumped together as structural policies. These include improving physical infrastructure, something that certainly employs a lot of people. But there are also what you might call soft structural policies, such as fostering entrepreneurship, simplifying taxation, and cutting regulations that inhibit job creation. Here in Britain we think we are not doing too badly on that score but as McKinsey warns: “Even the most business-friendly countries have regulatory barriers that stand in the way of job creation.”

Footnote to that: our Chancellor’s new Finance Bill out last week is, at 686 pages, the largest in history.